Glanbia milk-processing plan worth backing

Wednesday, November 07, 2012

By Joe Gill

Two years ago, Glanbia plc attempted to offload its dairy-processing assets to Glanbia Co-op.

That initiative failed by a narrow margin. Now, shareholders are again being asked to vote on a proposal that will give the co-op control of bulk dairy processing in Ireland, while creating a platform for investment in new capacity needed when milk quotas are abolished in 2015.

For the sake of clarity, I have no relationship with any part of the Glanbia Group and I am not beholden to any of the stakeholders involved in this debate.

In 2010, I was against the divestment idea, as it seemed to value the milk assets too expensively and left farmers with a headache regarding a new factory and pension liabilities. Now, I’d argue the new proposal, while complex, is a genuine effort that deserves support from farmer shareholders. Why?

* 1. It gives farmers, via their co-op, control over dairy-processing assets in Ireland. This allows them to manage margin and milk prices in a manner that balances the financial needs of the business with optimising farm gate prices for primary producers.

* 2. A buoyant Glanbia plc share price provides the resources to finance the co-op takeover of the dairy assets, while it also will be used to spin out shares directly to farmer members of the co-op.

* 3. Glanbia Co-op, while gaining control of its critical dairy processing assets at home, will retain a strategic and highly-valuable shareholding in Glanbia plc which is a “currency” that can be used in future to either reward farmer shareholders or provide additional funding for the domestic dairy processing plants.

* 4. Glanbia plc will be able to forge a future focussed entirely on maximising financial returns for its shareholders, an agenda that should improve the share price even further.

* 5. The overall plan provides the resources to finance a major new milk facility in Ireland, something that must be put in place if farmers want to exploit opportunities after 2015.

I’ve heard that the debate about this proposal is being weighed down by two key features: The complexity of the deal which makes it easier to say “no”; and the view that any new milk plant should not be funded by farmers.

Both of these arguments are flawed. The proposal is complex, because it is necessarily addressing a multitude of constituents including farmers and shareholders. I would be far more suspicious if this deal was presented as a Simple Simon answer. Farmers are far too intelligent for that type of approach.

Secondly, Ireland and its dairy farmers can either hide away from the milk industry after 2015, when volatile prices will be more frequent, or they can stand up to it. In 1982, New Zealand dairy farmers decided to take on the challenge of a liberalised milk market and grew their volumes from 5bn litres to 18bn today. Ireland had 5bn litres of milk then and the same today.

With quotas gone in three years, the opportunity exists to grow over the next decade or more, but that will cost money. With Ireland broke, and European coffers empty for food factories, it will be those who own these new facilities — farmers — who will have to foot the bill. This is an uncomfortable truth but, instead of running away from it, we should boldly embrace the challenge and structure the needed finances in a manner that minimises short-term effects on farmer incomes.

This proposal addresses all of these issues. Rejecting it would be a backward step.

This, of course, assumes farmers can manage the balance needed between farmgate prices and the margin required to fund new equipment, keep debts under control and provide the margin needed to sustain long-term development.

It is often the case that farm organisations, in their relish to look good for farmers, pay lip-service to the financial needs of co-ops, while demanding higher milk prices.

Glanbia Co-op can be a formidable dairy processor if, and only if, its board of farmer producers allow it to function efficiently in good times and bad. On the assumption that this is true, these proposals should be passed.